Open & closed end funds

Investors in an open-ended fund give a fund manager their money to invest on a collective basis. The term “open-ended” means that new shares can be issued in accordance with demand for them. When an investor wants to put money into the fund, new shares are issued. When they sell, the shares are “redeemed”. The buying and selling price of an open-ended fund always reflects the value of the underlying portfolio (minus any costs involved).

One problem with using open-ended funds to invest in illiquid assets – such as commercial property, for example – is that if investors demand their money back in large numbers, then the fund will be unable to liquidate its holdings rapidly enough to satisfy redemption requests. This is why many commercial property funds had to halt redemptions during the panic that followed Britain’s vote to leave the European Union in 2016. This is not a pleasant experience for investors who rightly expect to be able to access their money as and when they want to.

This is one reason why MoneyWeek prefers to use investment trusts – closed-end funds. An investment trust is simply a company whose business is investment. The trust lists on the stock exchange, and then uses the money raised to invest in a portfolio of assets. If an investor wants to invest in the trust, they simply buy the shares from another investor on the open market. As a result, the fund manager is never under pressure to sell out of the underlying portfolio purely to satisfy redemption requests.

This does mean that the share price of an investment trust will often trade at either a discount or a premium to the value of the underlying portfolio. But it also means that you can always get access to your money in a hurry if push comes to shove.

• See Tim Bennett’s video tutorial: Investing in funds – why we prefer investment trusts.